Defensive Dividends (Part 3): Honeywell International

Over the last week, I’ve been on the hunt for worthy dividend stocks in the defense sector. That hunt ends today with a look at one final stock. But in case you missed the run-up, here’s a quick recap…

Last Friday, I started out with the granddaddy of defense companies, Lockheed Martin (NYSE: LMT). The end result? A long, promising dividend history marred by a few concerning blank spots. And worse, a management hell-bent on sticking to a “maybe we will, maybe we won’t” approach to future dividend increases.

So long, Lockheed!

Then, on Wednesday, I tackled Boeing (NYSE: BA). Sad to say, it didn’t fare much better. Again, it looked promising: A low dividend payout ratio, a compelling history, etc. But all roads lead to management and Boeing’s says that dividends are going to take a backseat to share repurchases. As D&I Daily’s Louis Basenese has pointed out, that’s the wrong way to go.

That brings us to today. I have one more dividend-paying defense stock for you. Read on to see if we’ve finally bagged our 10-point dividend buck…

Some More Increases, Hon?

So far, I’ve been foiled twice by management teams that refuse to acknowledge just how much worth dividends hold for shareholders. Thankfully, today we’re in for some sweet reprieve.

This is what management sounds like when they aren’t full of malarkey:

“We’re going to make sure that we pay a very competitive dividend, recognizing the significance of that to our investors…”

So let’s run down a simple dividend check list to see if Honeywell has the makings of a reliable dividend payer:

Long-time dividend payer? Check. Honeywell’s been dishing out dividends for 42 years and running.

Regular dividend increases? Check. Since 2005, Honeywell has increased its dividend six times. And given that management’s actively pumping up shareholder expectations, that trend is unlikely to end.

Significant growth history? Check. The company’s five-year average dividend growth rate clocks-in at a respectable 8.88%. That’s well above the S&P 500’s average dividend per share growth of 1.7%.

Room for further increases? Once again, check. Honeywell’s dividend payout ratio (DPR) on a trailing 12-month basis is 54.4%, down from its DPR 58.3% in 2011. This gives it ample room for raises even if times get tough. To boot, its earnings are on the rise, which only adds to the confidence that it can increase its dividends going forward.

Outperforming the market? Double check. Not only is Honeywell outperforming the S&P, it’s outperforming its own aerospace and defense industry by an even bigger margin. Over the last year, it gained 30.42%. Compare that to 22.57% for the S&P and 10.64% for the industry during the same period.

So far so good, but there’s just one small catch…

Honeywell currently pays an annualized dividend of $1.48 per share, representing a 2.47% yield. In itself, that’s not bad at all. It’s about 0.5% above the average S&P 500 yield, and given the growth prospects, a middle-of-the-road yield shouldn’t deter us.

However, Honeywell’s currently trading at 22.6 times earnings. That’s way above both the industry average P/E of 13.1 and its own five-year average of 17.1. In other words, the stock’s expensive and the valuation needs to head south.

Otherwise, there’s no doubt about it. Honeywell’s a solid dividend payer with excellent growth prospects. By all means, add it to your watch list.

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